Maximizing Investment Opportunities with SB-9 in Los Angeles

[Felicia Nitu]

Hey BiggerPockets Community,

If you're a real estate investor or developer eyeing opportunities in Los Angeles, SB-9 (the California HOME Act) could be a game-changer for your strategy. It's creating new ways to unlock property potential and offers a pathway to profitable investments if you're targeting the right neighborhoods.

Here’s the deal: SB-9 allows to split a single-family lot into two parcels and build up to four units. Two on each lot. For investors, this can mean boosting rental income or increasing the property value significantly. Not interested in a lot split? No problem. You can still build two separate homes on the same lot, offering investment flexibility.

The streamlined approval process is a huge advantage, cutting out the red tape of lengthy public hearings. You'll need to meet requirements like parking and setbacks and might encounter additional hurdles in environmentally sensitive or historic areas. But for most properties, it’s a smooth way to add value and potentially start bringing in some rental income.

To give you an idea of what's possible, I ran an analysis on a project in Sycamore Square, Los Angeles. Imagine building a 4,000-square-foot, three-story duplex with a 1,000-square-foot ADU. The total cost including construction and permits (but excluding the land) comes to about $2.14 million. In this area, market values hit around $4.95 million, giving you a solid 131% ROI. Not bad, especially considering it’ll take about 9 months for permits and a year for construction.

Now, let’s say you decide to do a lot split with two 4,000-square-foot duplexes. This would run you about $3.48 million, but the market value jumps to $7.92 million, keeping the same 131% ROI. However, this only works in premium neighborhoods like Sycamore Square. In lower-value areas like Sylmar, market values max out around $3.28 million, which results in a loss.

The key takeaway? Investors need to target high-demand markets where property values can support development costs. For agents, this presents an opportunity to stand out by guiding buyers toward properties in these profitable neighborhoods, making you the go-to resource for savvy investors.

If you're curious about how SB-9 can work in other parts of California, definitely check out It's Time to Invest in California, now! The zoning changes will make California a hot real estate market. With zoning changes making California’s real estate market even more attractive, now’s a great time to dive in. I’ve done a lot of research on these projects, so feel free to ask any questions here. I’m happy to help and share what I’ve learned!

[Felicia Nitu]

Quote from @Alan Asriants:

Great information! This could be a game-changer for many investors in Los Angeles and California. Building on existing land helps eliminate the issue of land scarcity, which is a significant challenge due to California’s high real estate prices. Additionally, it provides investors with the opportunity to add a unit on a property they already own, simplifying management since the new unit is in the same location.

Finding a vacant lot is both expensive and difficult, so the ability to build, subdivide, and create new development opportunities can make financing easier. By having additional parcels, investors can generate more equity and value compared to simply adding an ADU. And again, with a separate parcel it should be easier to finance the construction and do a cash out refi.

My partner is a builder in the LA area, so if anyone is interested in taking advantage of SB-9 to build additional units on their property, feel free to reach out anytime

Sounds great, Alan! SB-9 is definitely exciting. I'll be happy to refer your partner whenever there's a client ready to start a project.